Now cheap foreign genius is easily available

In the mid-1930s, Ronald Coase, then a recent London School of Economics graduate, was musing over what to many people might have seemed a silly question: Why do companies exist? Why do we pledge our allegiance to an institution and gather in the same building to get things done? His eventual answer, which he published in his landmark 1937 article “The Nature of the Firm,”33 was this: companies exist to minimize “transaction costs”—time, hassle, confusion, mistakes. When people share a purpose and have established roles, responsibilities, and modes of communication, it’s easy to make things happen. You simply turn to the person in the next cubicle and ask that individual to do his or her job. But in a passing comment in a 1990 interview, Bill Joy, one of the cofounders of Sun Microsystems, revealed a flaw in Coase’s model. “No matter who you are, most of the smartest people work for someone else,” he observed, stating what has now come to be known as “Joy’s Law.” His implication: for the sake of minimizing transaction costs, we don’t work with the best people. Instead, we work with whomever our company was able to hire. Even for the best companies, that’s a woefully inefficient process.

As New York Times columnist Thomas Friedman puts it, “It used to be that only cheap foreign manual labor was easily available; now cheap foreign genius is easily available.” Not just cheap because they work for less money; cheap because they’re often working for no money at all, as global volunteers in a project that they believe in while some other job puts food on the table.

In short, because we don’t operate the company in a Coaseian model, we’ve got more and smarter people working for us. We minimize transaction costs with technology, not proximity.

A social network is our common roof. Skype is the “next cubicle.” Our shared purpose is really shared, not dictated.

Yet communities can’t make physical goods by themselves. Somebody has to do the manufacturing, handle the inventory, get the liability insurance, and run the customer support, and that takes money, a legal structure, and real day-to-day responsibilities. Thus, a company. So, in the new manufacturing model, you need a new kind of manufacturing company, too. At its core, it has to incorporate all the skills and learning of traditional manufacturing companies—tight quality control, efficient inventory management, and supply-chain management—so that it can compete with them on basic price and quality. But it also needs to incorporate many of the skills of Web companies in creating and harnessing a community around its products that allow it to design new goods faster, better, cheaper. In short, it must be like the best hardware companies and the best software companies. Atoms and bits.

Makers: The New Industrial Revolution by Chris Anderson